Sometimes taxes, subsidies, and rationing are combined. For example, we could consider a situation where a consumer could consume good 1 at a price of p₁ up to some level x₁, and then had to pay a tax on all consumption in excess of x₁. The budget set for this consumer is depicted in Figure 2.5. Here the budget line has a slope of –p₁/p₂ to the left of x₁, and a slope of -(p₁ + t)/p₂ to the right of x₁.

Making economics this boring is criminal. Everything this book says is important, but it goes out of its way to say it in the most dull and verbose manner possible. My professor, a young and apparently disaffected grad student, fares no better, doubtlessly convincing newcomers to the field that nothing interesting is going on here, we are only discussing high-minded abstractions irrelevant to your daily life. (If you’re reading this, please don’t lower my grade!)

I know for a fact that economics is fascinating, but this knowledge hurts because, during a class this dreary, I want to jump in front of the room and say “Don’t listen to this man! Economics is not boring! Economics is interesting, and every citizen should know about it! These fancy graphs and charts actually represent things!

“Economics is the lifeblood of a society! Economics is how civilizations rise and fall! Economics is whether or not a poor family can put food on the table! Economics is whether or not a bright young student can reach his full potential!

“Economics is whether or not a dictator can stand! Economics is whether or not a people can rise! Economics is how to live your life! Economics is how to see the world! Economics is not a bunch of bland, static theories… economics is where math and the real world collide! Economics is an entire world… and it is beautiful!”

…But, I’d probably get in trouble, so I won’t.

I know it’s important to learn the basic bricks of a system before you learn the towering theories they make up. There’s no reason it has to be boring, though… ask any game developer, “fun” is simply tedium implemented in a different way.

By the way: never explain something strictly in abstract terms. I cannot relate to someone having to choose how much of good x and good y he or she wants, within a budget of m dollars. But! I can relate to a college student who wants to buy pizza and soda for a party, but is limited to a budget of twenty dollars. Let’s say soda costs $1 a liter while pizza costs $2 a slice. That means that I can buy as many as 20 liters of soda, or 10 slices of pizza; but for every slice of pizza I buy, I am effectively giving up 2 liters of soda.

Now, get an L-shaped graph. One axis will be how much pizza you decide to buy, and the other axis will be how much soda you decide to buy. Mark the maximum amount of pizza you can buy–10 slices–on that axis, and mark the mark the maximum amount of soda you can buy–20 liters–on that axis. Now, draw a line between those marks.

That line represents how much you can buy of each good. Any point along the graph is a plausible scenario. For instance, in addition to buying 10 slices of pizza or 20 liters of soda, you could buy 4 slices of pizza and 12 liters of soda, 7 slices of pizza and 6 liters of soda, etc.

The triangle formed by the line and the two axes is your “budget set.” This is the total amount of stuff you can buy, between these two goods. You could choose a point within that triangle–for instance, 2 slices of pizza and 4 liters of soda–but you wouldn’t, because that wouldn’t be full value for your money. To get the most from your money, you’d want to choose a point along the line to represent your pizza-and-soda purchase.

The slope represents “opportunity cost.” How much of one good you must give up for one unit of the other good determines how steep the line is. Because I have pizza on the Y axis and soda on the X axis, two additional units of X (two liters of soda) results in one fewer unit of Y (one fewer slice of pizza). Those of you who have taken algebra know that the slope of the line is determined by “rise over run,” or a change in the Y value over its accompanying change in the X value. One fewer slice of pizza over two liters of soda is -½; that’s our slope.

See? That was easy! Now, you can do anything in microeconomics. Moreover, you can pass this knowledge on and let everyone know that economics can be easy and fun. Go forth!

[…] and bond maturation. When I began second-year economics at UO, taught by a graduate student, it was so horrible that I wrote this lengthy post that has become one of my most popular ever. (In short, the GTF made economics not only painfully […]